Presentation is loading. Please wait.

Presentation is loading. Please wait.

SUPPLY & DEMAND Non Sequitur by Wiley Miller MARKETS n Institution that brings together buyers (DEMAND) n and sellers (SUPPLY) of resources, goods and.

Similar presentations


Presentation on theme: "SUPPLY & DEMAND Non Sequitur by Wiley Miller MARKETS n Institution that brings together buyers (DEMAND) n and sellers (SUPPLY) of resources, goods and."— Presentation transcript:

1

2 SUPPLY & DEMAND

3 Non Sequitur by Wiley Miller

4 MARKETS n Institution that brings together buyers (DEMAND) n and sellers (SUPPLY) of resources, goods and services

5 DEMAND is n Amount of a good or service consumers are willing and able to buy n Major determinant of demand is PRICE n Amount of demand at each price is quantity n Quantity of demand at each price is shown in a Demand Schedule

6 DEMAND SCHEDULE (buyers) PRICEQTY DEMANDED $ $ $ $ $ $ $

7 DEMAND CURVE PRICE QUANTITY DEMAND

8 DEMAND CURVE n P is the vertical axis n Qty of D is the horizontal axis n Demand Curve is downward sloping because: –Common sense (lower price = buy more) –Diminishing marginal utility (the more consumers buy, the less satisfaction they receive) –Income & Substitution Effects

9 INCOME & SUBSTITUTION n Income Effect – the lower price increases the purchasing power of consumers n Substitution Effect – lower price gives incentive to substitute this item for those that are relatively more expensive

10 Diminishing marginal utility : n Consuming successive units of a particular product yields less and less extra satisfaction – consumers will only buy additional units if the price is lowered. ( the more consumers buy, the less satisfaction they receive)

11 LAW OF DEMAND n Demand varies inversely with price n If Price goes up – Demand goes down Ex: luxury cars n If Price goes down – Demand goes up - Ex: clearance sale

12 NON-PRICE DETERMINANTS n PREFERENCES – based on popularity or trends by consumers n INCOME EFFECT – how much money consumers have available to spend n POPULATION CHANGES – how many consumers are in this market n EXPECTATIONS OF CONSUMERS – what consumers think will happen in the future that affects their actions NOW!!

13 NON-PRICE DETERMINANTS con t. n Elasticity of demand – how much demand changes to respond to changes in price –More elastic when goods are luxuries Ex: steak, diamonds, SUV –More inelastic when good is needed Ex: medicine (insulin), soap, milk

14 NON-PRICE DETERMINANTS con t. n Related Goods SUBSTITUTION EFFECT –As price increases for a good, demand for its substitute (chicken for beef; generic) goes up n COMPLEMENTARY GOODS –As price goes down for one good, demand for that good & its complement both go up –DVD player on sale but DVD bought for regular price

15 NON-PRICE DETERMINANTS n REMINDER: P I P E E R –Preference of consumers (popularity) –Income of consumers ($$ to spend) –Population (# of consumers) –Expectations for future (what to do NOW?) –Elasticity (effect of price) –Related Goods substitute available? price of complementary good changes- demand for both changes?

16 A little more on consumer expectations 1. Expect P to go up in the future = D>now 2. Expect P to down in the future = D< now 3. Expect income to > in near future = D > now 4. Expect income to < in near future = D < now Example: The news announces that the P of CD players will < next week. What does D do?

17 Substitutes (+ relationship) n If the P of steak >, then the d for chick > n If the P of steak <, then the d for chick < n Pepsi for Coke…………………..

18 Complementary goods: inverse relationship n If the price of flashlights goes up, then the Demand of batteries goes down. n If the price of flashlights decreases, then the D for batteries_______?

19 Be wary of independent goods. They have no effect on one another Like Chinese food and chocolate puddin

20 Hurry Lads – to the white boards!

21 Change in QD – caused by a CH in the P of the product under consideration now. 1. shown by moving from one point to another along a stable/fixed demand curve. 2. Caused by a change in the P of the product 3. The P of T-shirts >, :. QD <

22 Change in D n Caused by a CH in one or more of the non-price determinants of D (whats the acronym?)……………. n 1. The P of the product does not change now. n 2. Shown by shifting the Dcurve. n D> shift to the right n D< shift to the left

23 Draw a DC based on the D schedule below these stupid words. 20oz Red BullCans of 20oz Red Bull $ $ $ $ $ $ $

24 What do you do with D if the price moves from $.50 to $1.50?

25 n A news report has just surfaced that energy drinks will make you smarter, better looking and smell like sunshine.

26 n Three 4 year old kids drank Red Bull last night and tweeked so hard that they brains froze up like the laptops at Guyer.

27 n 20 oz Red Bull is selling for $2.00 per can. n The price of Monster just dropped to 1.00 per 20oz can.

28 SUPPLY is n Amount of a good or service producers are willing and able to sell n Major determinant of supply is PRICE n Amount of supply at each price is quantity n Amount of supply at each price is shown in a Supply Schedule

29 SUPPLY SCHEDULE PRICEQTY SUPPLIED $ $ $ $ $ $ $ 0.255

30 SUPPLY CURVE PRICE QUANTITY SUPPLY

31 SUPPLY CURVE n Price is the vertical axis n Qty of supply is the horizontal axis n Supply Curve is upward sloping because: –Price and quantity supplied have a direct relation –Price is an incentive to the producer as they receive more revenue when more is sold

32 LAW OF SUPPLY n Supply varies directly with price n If Price goes up – Supply goes up n If Price goes down – Supply goes down

33 NON-PRICE DETERMINANTS n Cost of Production –Cost of producing goods & services –Ex: minimum wage for labor goes up –Ex: Natural disasters make costs go up n Expectations of producers –Predictions on how consumers will act n Resources that can be used to produce different goods –Corn instead of wheat

34 NON-PRICE DETERMINANTS n Technology –Improvements increase production n Taxes/Subsidies –Pay more tax which increases cost of production –Gov pays firm to produce n Suppliers (# of firms) REMINDER: C E R T T/S S

35 Book Version – page 48 Resource prices Technology Taxes and subsidies Prices of other goods Price expectations Number of sellers in the market

36 Shifts in Supply & Demand Curves n Increase - shifts to the right n Decrease - shifts to the left PRICE QUANTITY PRICE QUANTITY D 1 D 2 D 1 D 2

37 Shifts in Supply & Demand Curves n Increase - shifts to the right n Decrease - shifts to the left

38 Effects of Changes in both S&D page 53 in the book SDEq PEq Q ><< Indeterminate <>>Ind >>Ind> <

39 EQUILIBRIUM PRICE n Point where buyers and sellers are equally satisfied n Point where D & S curves intersect n Adam Smiths Invisible Hand Theory –Forces of S & D, competition & price make societies use resources efficiently

40 EQUILIBRIUM PRICE PRICE QUANTITY SUPPLY DEMAND E P EQ

41 Equilibrium n When supply = demand, there is equilibrium in the market n Equilibrium creates a single price and quantity for a good/service

42 Changes in equilibrium n When supply or demand changes, the equilibrium price and quantity change n If demand increases then price increases and quantity increases n If demand decreases then price decreases and quantity decreases n If supply increases then price decreases and quantity increases n If supply decreases then price increases and quantity decreases

43 P Q S D p q D1D1 p1p1 q 1 Increase in Demand D.: P & Q

44 P Q S D1D1 p1p1 q1q1 D p q Decrease in Demand D.: P & Q

45 P Q S D p q Increase in Supply S.: P & Q S1S1 p1p1 q1q1

46 P Q S D p q Decrease in Supply S.: P & Q S1S1 p1p1 q1q1

47 Simultaneous Changes in Supply and Demand n If supply and demand both increase then price is indeterminate, but quantity definitely increases n If supply and demand both decrease then price is indeterminate, but quantity definitely decreases

48 P Q S D p q Simultaneous Increase in Supply & Demand S & D.: P ? & Q S1S1 p1p1 q1q1 D1D1 q2q2

49 P Q S D p q Simultaneous Decrease in Supply & Demand S & D.: P ? & Q S1S1 p1p1 q1q1 D1D1 q2q2

50 Simultaneous Changes in Supply and Demand n If supply decreases while demand increases, then price definitely increases while quantity is indeterminate n If supply increases while demand decreases, then price definitely decreases while quantity is indeterminate

51 P Q S D p q Decrease in Supply w/ Simultaneous Increase in Demand S & D.: P & Q ? S1S1 p1p1 q1q1 D1D1 p2p2

52 P Q S D p q Increase in Supply w/ Simultaneous Decrease in Demand S & D.: P & Q? S1S1 p1p1 q1q1 D1D1 p2p2

53 Disequilibrium n If price occurs at some point where supply and demand are not =, then disequilibrium exists. n If the price is higher than the equilibrium price, then a surplus (Q s >Q D ) occurs n If the price is lower than the equilibrium price, then a shortage occurs (Q s

54 P Q S D pepe qeqe Market Disequilibrium (Price, p x, above Equilibrium Price, p e ) pxpx qsqs qdqd If price is p x, then q d < q s.: surplus exists (surplus = q s – q d )

55 P Q S D pepe qeqe qdqd qsqs If price is p x, then q s < q d.: shortage exists (shortage = q d – q s ) pxpx Market Disequilibrium (Price, p x, below Equilibrium Price, p e )

56 Causes of Disequilibrium n Price floor – a minimum price for a good/service or resource determined outside of the market –Ex. Minimum wage n Price ceiling – a maximum price for a good/service or resource determined outside of the market –Ex. Concert tickets sold by Ticket-master

57 P Q S D pepe qeqe Effective Price Floor (ex. Minimum wage in competitive unskilled labor market) p mw qsqs qdqd If price floor is effective, then q d < q s.: surplus labor exists

58 P Q S D pepe qeqe qdqd qsqs If price ceiling is effective then q s < q d.: ticket shortage exists ptpt Effective Price Ceiling (ex. Single price for admission to a popular concert )

59 SURPLUS n Supply is greater than demand at this price n Must adjust by lowering price to reach equilibrium supply demand SURPLUS D QtyS Qty P Q

60 Price Floors n Government sets minimum price –Price cant go lower –Causes surplus –Market cant adjust Ex: Minimum wage causes surplus of workers at set price

61 SHORTAGE n Demand is greater than supply at this price n Must adjust by increasing the price P Q S D SHORTAGE S QtyD Qty

62 Price Ceilings n Government sets maximum price –Price cant go higher –Causes shortage –Market cant adjust Ex: Rent controls, Price controls, Utility rates set by govt.

63 What else………… n Inferior goods - is a good that decreases in demand when consumer income rises n Superior goods - make up a larger proportion of consumption as income rises, and therefore are a type of normal good n Normal goods - are any goods for which demand increases when income increases and falls when income decreases but price remains constant n $ is not a productive resource – doesnt produce n Ppc – the origin n Ppc – perfectly shiftable

64 Conclusion n Markets work best when supply and demand determine the price of goods/services or resources. n When forces other than supply and demand determine the price of goods/services or resources, surpluses and shortages result. n Over time, the forces of supply and demand undermine artificial price controls –Ex. Black markets, ticket scalping, undocumented workers

65 Supply and Demand Curves conqui2.htm TIME TO PRACTICE GRAPHS!


Download ppt "SUPPLY & DEMAND Non Sequitur by Wiley Miller MARKETS n Institution that brings together buyers (DEMAND) n and sellers (SUPPLY) of resources, goods and."

Similar presentations


Ads by Google